Founded in 1984, The Jamestown Foundation is an independent, non-partisan research institution dedicated to providing timely information concerning critical political and strategic developments in China,…

The Oil Crash Nightmare For Kazakhstan

The latest meeting of the Organization of Petroleum Exporting Countries (OPEC) in Algeria, on September 28, brought some relief to producers, with the price of oil finally trading above $50 per barrel for the first time in months. News of a preliminary deal, whose implementation is scheduled for November, was met with optimism in Kazakhstan, a major oil producer and exporter in the former Soviet space, second only to Russia. Yet, the deal’s success hinges on a variety of factors beyond Kazakhstan’s reach. First, the OPEC members need to agree among themselves on the rules of play to avoid cheating. Second, Saudi Arabia and Iran need to put their rivalry aside to reach a durable compromise, while Tehran still insists that it will not agree to any production cuts until domestic output reaches certain pre-sanctions levels. Third, there is a non-OPEC country, Russia, with its own ambitions and an ability to disrupt the stabilization of oil prices if it decides to try to win more market share at the expense of the oil cartel (RBC, Inform.kz, Rosbalt.ru, September 28).

The recent change of prime minister in Kazakhstan (see EDM, September 19), with Bakytzhan Sagintayev succeeding his boss, Karim Massimov, who moved to chair the National Security Committee (KNB), is above all else a reflection of President Nursultan Nazarbayev’s economic concerns. The Kazakhstani economy will not grow by more than 0.1 percent this year, after 1.2 percent growth in 2015 and 4.3 percent in 2014. This is far below the 6–7 percent expansion achieved when the price of Brent crude oil consistently exceeded $100 a barrel. Next year’s GDP growth is expected to reach approximately 1 percent, according to the International Monetary Fund (IMF) and the World Bank; but it will depend on the government’s ability to implement structural reforms. It is clear, nonetheless, that no government, however creative and hardworking, is able to consistently do what should normally be done over several decades. Kazakhstan still depends on oil exports for over 60 percent of total government revenues and a quarter of its GDP (Kapital.kz, September 9; Kursiv.kz, July 17; Matritsa.kz, April 28).

One of the Kazakhstani government’s biggest fears is the repetition of social unrest like what happened in the western city of Zhanaozen, in Mangistau Oblast on the Caspian Sea, on December 16, 2011 (Independence Day). That year, hundreds of oil workers took to the streets to protest low salaries and unhealthy working conditions at two local energy companies, Karazhanbasmunay and Ozenmunaygas. The former is co-owned by the national oil company KazMunayGas (via its main production subsidiary, KMG E&P) and China’s CITIC Group. The latter belongs to KMG E&P, whose second-largest shareholder, after KMG (58 percent), is China Investment Corporation (11 percent). The protests lasted for more than eight months and ended in bloodshed. Clashes between protesters and the riot police resulted in 16 dead and over 100 wounded as Kazakhstan experienced the highest bout of instability since independence (Inform.kz, December 17, 2011; RIA Novosti, December 16, 2011; Tengrinews.kz, June 6, 2011).

The specter of Zhanaozen hovered again over the city this past September, when employees of a drilling company called Burgylau took to the streets to demand higher pay. They complained about poor sanitation, having to purchase spare parts with their own money, and “unfair” remuneration. It took local authorities several weeks to formulate a response, although there had earlier been a short-lived strike at Burgylau’s main production facility at the end of July 2016. The regional governor of Mangistau, Alik Aydarbayev, visited the site in person to reassure the striking workers by promising them additional contracts from the shareholder, KMG, for at least 34 new wells by the end of the year. He also said that wages would soon be realigned with KMG’s unified salary grid, even though Burgylau’s statutes do not provide for such a harmonization (Forbes.kz, October 6; Radio Azattyk, October 6, August 1; Lada.kz, September 29).

The problem in the wider Mangistau region is bigger than it actually seems. While Kazakhstan prepares to relaunch production at the giant Kashagan oilfield in neighboring Atyrau Oblast, the majority of Mangistau deposits are almost entirely depleted. Oil from Kashagan was stopped for three years in 2013, but will certainly require more spare hands in the next few months and years. The North Caspian Operating Company (NCOC) consortium, whose shareholders include both KMG and China National Petroleum Corporation (CNPC), looks keen to pump at any price in order to recover its initial investments. However, the increased employment opportunities are unlikely to be a boon for the Mangistau workforce because it is comprised mostly of low-skilled workers, not high-qualified engineers. Thus, it will be much easier and more convenient for NCOC to hire among the local population of Atyrau rather than to relocate workers from the south (Kursiv.kz, October 5; Inform.kz, September 24; Vlast.kz, September 15).

The Zhanaozen predicament clearly speaks to the need to diversify the Kazakhstani economy away from hydrocarbons—and doing so as quickly as possible in spite of the resistance of vested interests, entrenched bureaucrats and big business. According to most forecasts, the price of oil will stay below $50–55 per barrel in 2017, amid global oversupply and weaker-than-usual demand from China, India and other important consumers. With the 76-year-old Nursultan Nazarbayev still in power, Central Asia’s largest economy would obviously be significantly better off if it embarked on reforms before the inevitable presidential succession. The current oil crisis and the economic stagnation it has spawned are both a risk and an opportunity for the country. Political stability is a key element of the ideal recipe for Kazakhstan, which saw a new wave of terrorist incidents in June–July 2016. The country needs strong leadership to weather the ongoing downturn (Forbes.kz, July 18; Kapital.kz, June 6).

The Jamestown Foundation

Founded in 1984, The Jamestown Foundation is an independent, non-partisan research institution dedicated to providing timely information concerning critical political and strategic developments in China,…